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Friday, November 8, 2019

Education Or Business Forget free college. The future of the US workforce depends on a higher education worth paying for

Discussions on the future of work tend to be aspirational — workers can live where they want, work how they want, for whom and when they want. The benefit of this new collaborative but disparate workforce for companies is that they gain the ability to scale the business quickly with just the right talent, filling specific niches. It's a win-win. Workers are happy, and companies get what they need ... in theory.

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Unfortunately, talent shortages have become the top emerging risk organizations face, with large companies struggling to fill technology positions, revealed a recent Gartner survey. Approximately 918,000 unfilled IT jobs were listed in the U.S. over the last three months alone, as tech job postings continue to rise. By 2030 the global demand for skilled workers will exceed supply by more than 85.2 million workers. This translates to $1.748 trillion in lost revenue for U.S. companies, or roughly 6% of the economy, according to global organizational consulting firm Korn Ferry.

Yet to have the greatest, most agile, most modern workforce in the world, to live in a better America, to embrace the future and solidify our position as a technology superpower, we have to have qualified workers that push the future of work forward. And the only way to do that is to hold our higher education responsible for the real-life outcomes of its students, equipping the workers of tomorrow with the necessary, relevant skills for success rather than simply handing them a paper diploma and wishing them well.

For more on tech, transformation and the future of work, join CNBC at the @Work Summit in San Francisco on April 1, 2020.

On top of this, there must be a solution to the ballooning student debt crisis ($1.6 trillion and counting), which affects tens of millions of Americans and further threatens future economic prospects. Workers must be able to access skills-based training without digging themselves into an insurmountable financial hole.

Within this context, let's consider how the present crop of presidential candidates proposes to solve these problems.

Treating the symptom, not the disease-

Former Vice President Joe Biden says that as president he'd lower student loan payments for people in income-based repayment plans. Bernie Sanders wants to erase all of the $1.6 trillion of outstanding debt and make public colleges tuition- and debt-free. Elizabeth Warren would cancel $640 billion of the debt and eliminate tuition and fees at public colleges. Pete Buttigieg wants to expand Pell grants. Kamala Harris and Cory Booker have endorsed using federal matching grants to incentivize states to invest more in two-year and four-year colleges.

Elizabeth Warren speaking at Keene State College a day after Congress announced the beginning of a formal impeachment inquiry of President Donald Trump. The Massachusetts senator and presidential candidate say that if elected, she plans to cancel $640 billion of student loan debt and eliminate tuition and fees at public colleges.

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Preston Ehrler | SOPA Images | LightRocket | Getty Images

While these candidates should be applauded for shining a light on the problems associated with student loan debt and the flaws in the modern education system, these plans all have one major thing in common: They're focused on treating a symptom — that is, the large, burdensome debt load of American college and university graduates. But they're failing to treat the underlying disease — providing a higher-education system that's worth paying for and is held accountable for turning out students with the essential talent necessary to work for today's employers.

Current proposals instead present surface-level solutions that ignore the underlying root cause of the student debt crisis: the misalignment of expectations between schools (subject matter mastery) and their students (acquisition of skills to get a good job). This mismatch affects students' ability to fully participate in and help cultivate the future of work. This is not a problem isolated to the technology industry. It's systemic.

Even within academia, less than half of faculty members at four-year colleges and universities thought school readied them for their jobs. We must demand more cohesion between the acquisition of knowledge and application of skills to future careers because the ultimate cost is too high — America's economic competitiveness is at stake.

3 ways to hold higher education accountable

Moving forward, one thing is clear: Resolving the student loan crisis and gaining a qualified workforce will not come from "free" college (after all, free college is never really "free"; it would likely be paid for via higher taxes). It instead will require providing an education that aligns the interests of schools with not only their students but future employers as well — and holds higher education accountable for the practical results of graduates.

Here are three ways this can be achieved-

1. Make alumni performance the measure of school quality (aka reform accreditation around workplace outcomes of graduates). The US doesn't have an official minister of education quality control, so it relies on an outside accreditation system. The federal government uses this system to determine whether tuition is worth the cost.

The government has the power to demand that schools begin placing more weight on the employability or real-life workplace outcomes of their graduates. ... Schools should be judged on how well they help students live up to their hiring potential.

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There are a lot of problems with the current system, such as the fact that quality varies widely from school to school, and different accreditors use different ways of measuring school quality. However, because the government is the biggest, most important customer of these accreditors, it has the power to demand that schools begin placing more weight on the employability or real-life workplace outcomes of their graduates. This doesn't mean schools have to be, or even should be, judged on how much money their students make when they graduate. It means that schools should be judged on how well they help students live up to their hiring potential.

2. Embrace ISAs. Income-Share Agreements are probably the single most effective way to embrace a market mechanism to foster accountability of schools to their students. Whether it's a President Biden, Bernie or Booker, we know that as long as schools continue getting tuitions paid, regardless of the employability of their graduates, we risk perpetuating the debt crisis. ISAs take aim right at it.

It works like this: Trade schools or colleges make an agreement that students will share a percentage of their salary only when they find a job after completing their program. The amount can range from 7% to 20% of the graduate's income — and only for a limited period of time, usually from one to five years. Think of it as a built-in mechanism where students share part of their success to fuel the next generation of students and ongoing health of the workforce.

ISAs prove that students don't have to live with debt their whole lives. They have been pioneered successfully in Europe and Australia, and are now increasingly being embraced in the United States. Among others, Purdue University offers ISAs, so does Clarkson University and the University of Utah. And this September, UC San Diego began offering an ISA program. Schools only get paid if their students succeed professionally so the incentive to train people for the future of work is quite high.

3. Get employers more involved. The pace of new skills needed on the job is fast and getting faster. Consider that most of the in-demand skills today — like mobile software development, AI, 3-D printing, nanotechnology — barely existed a decade ago. Skills prioritized today likely will not be the same ones tomorrow. In fact, according to a 2016 World Economic Forum report, 65% of children entering primary school will end up in jobs that don't yet exist.

With that kind of skill churns, curriculums need to be constantly updated, and employers are uniquely positioned to help schools anticipate the rapidly changing jobs market to come. After all, employers are the direct beneficiaries of a skilled labor force. They should step up their involvement and investment in preparing students and workers for the future.

The United States has been the world's technological leader over the past half-century because of its investment in human capital. The continued viability of the country's technology-driven economy and the future of work will depend on the quality of human capital more than ever as talent wields its own currency. Making schools effective and economically accessible is vital for success.

Now is the time to hold schools accountable to students. Who will move beyond aspirations and step up to embrace actual tactics to improve the workforce? Who will do what is necessary to preserve economic stability? November 2020 in just one year away. It won't be long before we find out who truly champions the future of work with policies to strengthen and preserve the talent pipeline.

—By Sylvain Kalache, co-founder of the Holberton School

Career Education Stock Is Baselessly Down Due To Insider Sales

My most successful strategy has been turnarounds. Career Education Corporation (CECO) is a late-stage turnaround that has quietly become a growth company. The market has not yet woken up to this.

In fact, the stock recently got knocked back needlessly by insider sales. Insider activity can significantly move a stock in both directions. CECO's stock was cut by a third from a peak reached after second-quarter earnings in early August. But often investors don't look closely enough at the details. Reality couldn't be more different. Operating results are accelerating, and the stock sold; well, it was mostly given to the insiders one month earlier.

Background

CECO is a for-profit higher education company headquartered in Schaumburg, Illinois. It offers online and campuses higher education through two regionally accredited universities - Colorado Technical University ("CTU") and American InterContinental University ("AIU"). Most of the students are online. Both universities provide degrees from associate and bachelor to master's and doctoral. CTU offers degrees in business studies, nursing, computer science, engineering, information systems and technology, cybersecurity, criminal justice, and healthcare management. AIU offers degrees in business studies, information technologies, education, and criminal justice.

The for-profit higher education industry expanded rapidly until the late 2000s. At that point, numerous problems surfaced regarding recruiting and quality of education. The government, in some cases, withdrew student loans from some of the worst offenders, effectively shutting them down. CECO was the poster boy for all that was wrong when 60 Minutes did a smackdown story on it in January 2005. The company survived, but not before closing many of its schools due to declining enrollment. This led to significant losses from 2012 to 2016 as it was forced to teach out the schools being closed. The last discontinued schools were completely closed in 2018. CECO returned to profitability in 2016 and returned to consistent student enrollment growth in 2019. Expenses from the closed schools are now in the past.

The company is now solidly profitable and has a strong balance sheet. Adjusted earnings for the quarter ended September 30, 2019, were $0.33, well above the $0.24 estimate. GAAP earnings were $0.25 per share, and the difference to non-GAAP was primarily a $7.1 million legal settlement. The company raised its adjusted EPS guidance three times this year. It now expects full-year 2019 adjusted earnings to be $1.33 per share (at the midpoint). This was raised from $1.22 at the second-quarter earnings announcement and $1.13 at the first-quarter earnings announcement. Adjusted earnings were $1.05 in 2018. Growth continues, as of September 30, 2019, and enrollments were up 6.1% from one year earlier.

Career Education stock chart-

As shown above, the stock was strong in the summer of 2019, especially after the second-quarter earnings announcement in early August. But it retreated significantly starting in September. The slide coincided with significant insider stock sales detailed below. There was no other news during that period other than the $7.1 million legal settlement, which is not that material to a company this size. I believe the insider sales were the reason for the decline as the stock consistently dropped on the days they were filed. What I have done below is drill down to look at the stock sales. What I found was almost all shares sold were given to the insiders in August. Insider holdings are actually significant across the board.

Officers and directors were given a total of 306,902 shares on August 12, 2019. Of these, they subsequently sold 80,255 shares at a market price and kept the rest. In addition to those sales, since March 31, 2019, they sold another 30,229 shares, less than 1% of their holdings. Finally, SVP Ayers bought and sold 207,208 shares in several transactions on the same day. He ended up with 6,949 more shares than he started with. After all, was done, the insiders had 196,418 more shares than they had on March 31, 2019. Share grants are a taxable event and insiders often sell some to pay their taxes.

I consider the CEO and CFO to be by far the two most important insiders when it comes to stock transactions. That is because they are usually the only ones who can see the full picture. In this case, neither CEO Nelson nor CFO Ghia sold any shares in this period. Also, none of the directors sold the shares they were given.

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Strengths/Catalysts-

The analysis above and the just-announced third-quarter earnings show that the stock slide based on insider sales was baseless. CECO is a growing company that should be able to increase earnings even faster than revenues for some of the reasons given below. Strengths and catalysts of CECO include the following.

1. The balance sheet is strong. On September 30, 2019, CECO had $312 million in cash and equivalents and no interest-bearing debt.

2. The company just announced a $50 million share repurchase program. That's about 5% of the market cap. It can easily fund this program.

3. The huge cash position will allow CECO to do something it hasn't until recently, grow through acquisitions. The recovery is over; time to grow. Management has indicated that acquisitions are now part of the plan, and it announced its first in a long time. On March 8, 2019, CECO announced the acquisition of Trident University for $35-44 million in cash. Trident had approximately $46 million in revenue and approximately $9 million in EBITDA during its fiscal year ended June 30, 2018. Since CECO is paying cash, the acquisition should be accretive from the beginning. Subsequent merger efficiencies should also be significant as this is a bolt-on acquisition. CECO will plug Triton into its AIU segment. There is significant more cash available for acquisitions before they ever need debt.

4. This type of business is often counter-cyclical and makes a good defensive holding as well as for growth. CECO did just fine during the last recession. The year 2008 was a little off, but earnings increased each year from 2008 to 2010. Those were some of their best years.

5. Management just guided new student enrollments to increase 12-13% in all of 2019.

6. Insider stock holdings are quite large. All seven officers listed as insiders own at least $1.5 million of stock. Six are over $2 million. This is a high level for officers.

7. The for-profit higher education industry has turned around in the last few years, and regulatory issues have diminished considerably. There is no longer an industry headwind. Peers are also reporting solid earnings beats.

8. CECO has a small real estate footprint. Most of its teaching is now online. Online is where many things are moving and a simpler business model.

9. Management attributed some of the recent EPS guidance raise to improved student retention. This is due to better analytics, some using AI, and according to the last conference call, "increased staffing, training, and development within our student advising functions".

10. AIU is much less profitable as a percentage of revenues than CTU. CEO Nelson on the last call mentioned this was primarily due to scale. AIU is growing faster and its earnings are jumping. Operating income went 2.3% of revenues in the first nine months of 2018 to 6.3% in the same period in 2019. That's on a 16.4% revenue increase. CTU's operating profit margin was 24.7% in the first nine months of 2019. This indicates, with continued revenue growth, AIU has a long runway of earnings growth ahead. Plugging Triton into AIU should help too.

Concerns-

The major risks I see associated with this investment are summarized below.

This industry is highly regulated and CECO has a history of regulatory issues, though it's been a while. In addition to the 60 Minutes exposé, the company recently settled two regulatory actions for $30 million and $7.1 million. The $7.1 million is pending court approval. The $30 million was from an FTC inquiry started in 2015. CECO has new management since then. However, CEO Nelson was the CEO of Education Management Corp., another for-profit higher education company from 2008 to 2012. That company went under in 2017 and did have regulatory issues.

Provisions in the recently passed Higher Education Act allow borrowers to seek loan forgiveness if a college or university misled them, or engaged in other misconduct in violation of certain state laws. The law is still pending. This would have been a huge problem a decade ago, but the industry appears to be in a much better place now.

Management compensation is high in my opinion for a company this size. The CEO's total compensation was $7.2 million in 2018. The top five officers received $13.6 million combined. Much of that was non-cash and about 40% was incentive pay due to the good performance of the company.

Valuation-

CECO's days in recovery are now over and the market should soon notice this is a growth company. I have found it often takes a while for investors to realize a major change like this.

As shown above, CECO's peers are growing EPS about 5-10% per year on average, though Grand Canyon has gotten better growth recently. Strategic (NASDAQ: STRA) just went through a merger that doubled its size and EPS growth is being driven by merger efficiencies. Both ATGE and LOPE have just reported solid earnings beats. CECO has grown EPS much faster primarily due to coming off a loss. However, its new guidance is for 26.7% EPS growth in 2019, up from a solidly profitable 2018.

CECO's analyst estimate of 8% growth in 2020 is likely to get adjusted up based on the recent big earnings beat. I expect 10-15% EPS growth in 2020 based on earnings momentum, the stock repurchase plan, the Triton acquisition, and rapid earnings improvements at AIU as it scales up. The first three items are unlikely to be in analysts' estimates yet.

With an above-industry level of EPS growth and cash levels, I believe a PE ratio of 16-20 is appropriate. That is only slightly above the peer average. Using a PE ratio of 18, based on 2019 guided EPS of $1.33, that puts the current value of $23.94. That is 51% above the closing price of $15.89 on November 7, 2019. But it is only slightly above the $22.28 high recorded in August, just before the insider sales induced a stock slide. That is the value today. My one-year target is $27, which is 12.5% above today's value.

Disclosure: I am/we are long CECO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Expert: Here are the education trends that local businesses should track-

No result found, try new keyword! Lynch specializes in financing related to both higher education and private K-12 schools. Here, he chats with Orlando Business Journal about the trends in the area's education industry: What trends ...